Segment Information

Segment Data

We currently report the following four segments in our consolidated financial statements: consumer, business, wholesale and hosting. Each of the segments is described further below:


•	Consumer. Consists generally of providing strategic and legacy products and services to residential consumers. Our strategic products and services offered to these customers include our broadband, wireless and video services, including our Prism^TM TV services. Our legacy services offered to these customers include local and long-distance services.

•

Business. Consists generally of providing strategic and legacy products and services to commercial, enterprise, global and governmental customers. Our strategic products and services offered to these customers include our private line, broadband, Ethernet, MPLS, data integration, Voice over Internet Protocol ("VoIP") and network management services. Our legacy services offered to these customers include local and long-distance services.

•

Wholesale. Consists generally of providing strategic and legacy products and services to other communications providers. Our strategic products and services offered to these customers are mainly private line (including special access), dedicated internet access, digital subscriber line ("DSL") and MPLS. Our legacy services offered to these customers include resale of our local access services, the sale of unbundled network elements ("UNEs") which allow our wholesale customers the use of our network or a combination of our network and their own networks to provide voice and data services to their customers, long-distance and switched access services and other services, including billing and collection services, pole and floor space rentals, public access services and database services.


•	Hosting. Consists primarily of providing colocation, managed hosting and cloud hosting services to commercial, enterprise, global, governmental and wholesale customers.

Our segment results are summarized below:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
	(Dollars in millions)
Total segment revenues	$	4,264		4,267		12,836		12,799
Total segment expenses	2,161			2,089		6,378		6,056
Total segment income	$	2,103		2,178		6,458		6,743
Total margin percentage	49		%	51	%	50	%	53	%
Consumer:
Revenues	$	1,491		1,503		4,500		4,508
Expenses	611			605		1,793		1,728
Income	$	880		898		2,707		2,780
Margin percentage	59		%	60	%	60	%	62	%
Business:
Revenues	$	1,569		1,544		4,692		4,574
Expenses	997			932		2,935		2,701
Income	$	572		612		1,757		1,873
Margin percentage	36		%	40	%	37	%	41	%
Wholesale:
Revenues	$	843		878		2,571		2,694
Expenses	285			293		844		868
Income	$	558		585		1,727		1,826
Margin percentage	66		%	67	%	67	%	68	%
Hosting:
Revenues	$	361		342		1,073		1,023
Expenses	268			259		806		759
Income	$	93		83		267		264
Margin percentage	26		%	24	%	25	%	26	%

Effective November 1, 2014, we implemented a new organizational structure designed to strengthen our ability to attain our operational, strategic and financial goals. The change in our organizational structure will likely result in some modifications of our segment reporting, which we expect to finalize in the fourth quarter of 2014 and report in our consolidated financial statements for the year ending December 31, 2014.

Recent Changes in Segment Reporting

During the first quarter of 2014, we adopted several changes with respect to the assignment of certain expenses to our segments. We have restated our previously reported segment results for the three and nine months ended September 30, 2013, to conform to the current presentation. The nature of the most significant changes and the related effect on segment expenses for the three and nine months ended September 30, 2013, are as follows:


•	The method for allocating certain shared costs of consumer sales and care, including bad debt expense and credit card fees, was revised, which resulted in an increase in consumer segment expenses of $25 million and $67 million with a corresponding decrease in business segment expenses for the three and nine months ended September 30, 2013, respectively; and

•

Hosting segment expenses have been conformed to the reporting of our other segments’ expenses. Specifically, the progress of our integration efforts and centralization of certain administrative functions enabled us to discontinue including certain finance, information technology, legal and human resources expenses in the hosting segment, which resulted in a decrease of $16 million and $55 million in hosting segment expenses for the three and nine months ended September 30, 2013, respectively.

Product and Service Categories

We categorize our products, services and revenues among the following four categories:

•

Strategic services, which include primarily broadband, private line (including special access which we market to wholesale and business customers), MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video service), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including resold satellite and our facilities-based video services), VoIP and Verizon Wireless services;


•	Legacy services, which include primarily local, long-distance, switched access, Integrated Services Digital Network ("ISDN") (which uses regular telephone lines to support voice, video and data applications) and traditional wide area network ("WAN") services (which allow a local communications network to link to networks in remote locations);


•	Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and business customers; and


•	Other revenues, which consist primarily of Universal Service Fund ("USF") revenue and surcharges. Unlike the first three revenue categories, other revenues are not included in our segment revenues.

Our operating revenues for our products and services consisted of the following categories:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2014		2013	2014	2013
	(Dollars in millions)
Strategic services	$	2,310	2,212	6,889	6,562
Legacy services	1,769		1,892	5,401	5,767
Data integration	185		163	546	470
Other	250		248	757	754
Total operating revenues	$	4,514	4,515	13,593	13,553

During 2013, operating revenues attributable to portions of certain bundled services were revised from legacy services to strategic services. Specifically, the revision resulted in a reduction of legacy services revenues of $32 million and $96 million and a corresponding increase in strategic services revenues for the three and nine months ended September 30, 2013, respectively. The revision was in response to over-allocating a percentage of the discounts to broadband services revenues and under-allocating a percentage of the discounts to local and long-distance services revenues under bundled services arrangements, which resulted in strategic services revenues being understated and legacy services revenues being overstated.

During 2013, operating revenues attributable to certain Competitive Local Exchange Carrier ("CLEC") retail services were revised from strategic services to legacy services. Specifically, the revision resulted in a reduction of strategic services revenues of $10 million and $29 million and a corresponding increase in legacy services revenues for the three and nine months ended September 30, 2013, respectively. The revision was in response to recording certain legacy services revenues generated through CLEC services arrangements as strategic services revenues, which resulted in strategic services revenues being overstated and legacy services revenues being understated.

Other operating revenues include revenues from universal service funds, which allow us to recover a portion of our costs under federal and state cost recovery mechanisms, and certain surcharges to our customers, including billings for our required contributions to several USF programs. We also generate other operating revenues from leasing and subleasing of space in our office buildings, warehouses and other properties. Because we centrally manage the activities that generate these other operating revenues, we do not allocate these revenues to any of our four segments presented above.

We recognize revenues in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflects the related expense for the amounts we remit to the government agencies. The total amount of such surcharges that we included in revenues aggregated approximately $128 million and $119 million for the three months ended September 30, 2014 and 2013, respectively, and approximately $395 million and $368 million for the nine months ended September 30, 2014 and 2013, respectively. Those USF surcharges, where we record revenue, are included in the "other" operating revenues and transaction tax surcharges are included in "legacy services" revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to include in our bills to customers, for which we do not record any revenue or expense because we only act as a pass-through agent.

Allocations of Revenues and Expenses

Our segment revenues include all revenues from our strategic, legacy and data integration operations as described in more detail above. We assign each of our customers to a single segment and report all of the revenues we derive from that customer to that segment, with the exception of hosting revenue generated from business and wholesale customers, which is currently reported as hosting segment revenues. We report our segment expenses for our four segments as follows:


•	Direct expenses, which primarily are specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities; and


•	Allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses.

We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the chief operating decision maker ("CODM") by segment. Similarly, we do not assign to our segments severance expenses, restructuring expenses and certain centrally managed administrative functions (such as finance, information technology, legal and human resources). Interest expense is also excluded from segment results because we manage our financing on a total company basis and have not allocated assets or debt to specific segments. Similarly, we exclude other income (expense) from our segment results.

The following table reconciles segment income to net income:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
	(Dollars in millions)
Total segment income	$	2,103		2,178		6,458		6,743
Other operating revenues	250			248		757		754
Depreciation and amortization	(1,097		)	(1,135	)	(3,297	)	(3,375	)
Impairment of goodwill	—			(1,100	)	—		(1,100	)
Other unassigned operating expenses	(637		)	(876	)	(1,991	)	(2,210	)
Other income (expense)	(320		)	(320	)	(974	)	(918	)
Income tax expense	(111		)	(40	)	(369	)	(372	)
Net income (loss)	$	188		(1,045	)	584		(478	)

We do not have any single customer that provides more than 10% of our total consolidated operating revenues. Substantially all of our consolidated revenues come from customers located in the United States.